VGSF - WU Vienna - LC

Denis Gromb, HEC Paris

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Denis Gromb from HEC Paris to present his re­search pa­per.
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Con­flict­ing Pri­or­it­ies: A The­ory of Cov­en­ants and Col­lat­eral

Debt se­cured by col­lat­eral is re­paid ahead of un­se­cured debt, even if taken in vi­ol­a­tion of cov­en­ants. We develop a model in which this pri­or­ity leads to con­flicts among debt con­tracts, but can be op­timal non­ethe­less. Whereas cred­it­ors’ op­tion to ac­cel­er­ate fol­low­ing cov­en­ant vi­ol­a­tions can de­ter di­lu­tion by new se­cured debt, pre­vent­ing over­in­vest­ment, their op­tion to waive cov­en­ants al­lows some di­lu­tion, pre­vent­ing un­der­in­vest­ment. The op­timal debt struc­ture trades off over- and un­der­-in­vest­ment, block­ing “bad” but not “good” di­lu­tion. It is mul­ti-layered, in­clud­ing se­cured and un­se­cured debt with and without cov­en­ants. Our res­ults are con­sist­ent with several debt struc­ture reg­u­lar­it­ies.

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